It takes one 'killer idea' to make history. Next month, @IDFCMF is all set to unveil one such idea - India's first US bond fund. Why is it so revolutionary? 3 reasons.
First, when the US Fed hikes rates, everything (stocks, bonds, gold) goes down. Only the yields on US treasuries go up. But for Indians there was no straightforward way to benefit from rising treasury yields. From next month, there will be.
The IDFC feeder fund will feed into a JP Morgan fund which invests in US treasuries of 0-1 year maturity. US treasuries have historically high yields, close to 5%. If you add another 3-4% rupee depreciation to it, you have a respectable 8-9% return in rupee terms.
Let's be clear, Indian liquid funds have beaten US treasuries almost every year for the past 10 years even adjusting for rupee depreciation. But things have changed now, and dramatically with rising yields.
Second, what if you have expenses in US dollars such as foreign travel or education. Saving for them in rupees means being vulnerable to rupee depreciation. This fund will allow you to save in dollars without taking the risk of buying US stocks (like other feeder funds do).
Third, what if you are bullish on the dollar in general. Indians had no easy way to take the dollar-rupee trade without also taking a view on US stocks. What do I mean? Let's say you think the dollar will go up another 10% this year. To carry out this trade you have to either
1) Buy futures on the NSE and roll them over every month and deal with mark-to-market settlement and paying tax on it as business income.
2) Invest in a feeder fund (like the Motilal Nasdaq ETF) which is also affected by how stocks do (so not a clean bet).
2) Invest in a feeder fund (like the Motilal Nasdaq ETF) which is also affected by how stocks do (so not a clean bet).
3) Remit money to a US broker under LRS and buy a US treasury ETF - but the government has proposed a 20% tax collected at source on all remittances from July.
4) Trade on forex apps, but they're not allowed for Indian residents.
4) Trade on forex apps, but they're not allowed for Indian residents.
So in short, no easy way to take a clean bet on the dollar. The IDFC fund which invests in short dated US treasuries comes closest to a clean bet (bond prices will affect your returns but these are not very volatile).
This fund will open the gates to more US bond funds, which is also fantastic for Indian investors Expense ratio (including for the underlying scheme) is expected to be 0.12% for the direct plan and 0.19% for the regular plan.
Limit for feeder funds investing in ETFs of USD 1 billion is rapidly being consumed. It may be a small window before money floods into these kinds of schemes and they all close for subscription. RBI has shown no signs of hiking the industry limit yet. livemint.com
Here's a chart on that
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